Brussels puts Italy on notice for breaching EU spending rules

Italians are tired of living under austerity. That could be a big problem for the EU.

The European Commission took the first step in launching a disciplinary process against Italy over the populist government’s defiance of EU spending rules.

The move came six months after the Commission and the Italian government struck a compromise to avoid triggering the process, which could lead to a €3.5 billion fine, although Brussels has shied away from imposing such penalties in the past.

The Commission’s decision to launch the Excessive Deficit Procedure (EDP), a program intended to bring government spending back in line with EU rules, highlighted Rome’s isolation on the EU stage. Also on Wednesday, the Commission released Spain from the procedure, meaning Italy is the only country now with a financial black mark against it from Brussels.

“We look at [Italy’s] main macroeconomic indicators, and they are all flashing red … [the] budget deficit is growing, public debt is growing, growth is slowing down,” European Commission Vice President Valdis Dombrovskis told reporters in Brussels.

The Commission will now ask the Council of the EU to formally launch the EDP

But the Italian government — made up of the far-right League and the anti-establishment 5Star Movement — sounded a defiant note, saying higher public spending is necessary to reboot Italy’s struggling economy.

Austerity is EU wide the Italians are struggling as well. Austerity measures mandated by the European Union since the beginning of the decade failed to sort out longtime structural problems. Rome has few economic tools to jump-start the economy because euro-zone countries agree to follow E.U. monetary guidance aimed at stabilizing the currency for all euro-zone members.

Despite some E.U. concessions obtained by former prime minister Matteo Renzi, the country is still obliged to severely reduce its budget deficit and public debt to respect the European guidelines and avoid heavy economic sanctions.

Italians are tired of living under the E.U.’s strict fiscal rules.

The Italian general election in March 2018 was a political earthquake felt throughout Europe, as it resulted in victories for the country’s two largest populist parties and the sharp defeat of the incumbent Democratic Party.

The Five Star Movement, an anti-establishment party founded by comedian Beppe Grillo, claimed more than 30 percent of the vote.

Austerity creates the environment of the far right. The League, a nationalist, anti-immigrant party with close ties to the National Front in France and Viktor Orbán in Hungary, came in second with 17 percent.

After several twists and turns, the two parties, once foes launching scathing attacks on each other throughout the campaign, agreed to form a government led by the relatively unknown Giuseppe Conte, a professor of civil law with ties to the Five Star Movement.

“We don’t want other [countries’] money, we just want to invest in jobs and growth,” Matteo Salvini, deputy prime minister and League leader, said on Wednesday after the Commission’s announcement.

“The only way to reduce the debt created in the past is to cut taxes and allow Italians to work more and better … With cuts, sanctions and austerity, debt, poverty and unemployment grew. We must do the opposite,” he added.

ITALY SINGLED OUT

The 5Stars’ European Parliament delegation issued a statement saying: “The Commission is once again applying double standards… Italy is the only country at risk of being sanctioned while others — like Germany and The Netherlands — have been ignoring EU parameters with their enormous surpluses.”

The Commission will now ask the Council of the EU to formally launch the EDP. The Council is widely expected to give the green light within two weeks.

EU FISCAL POLICY OF AUSTERITY

EU rules require countries to keep their public debt under 60 percent of gross domestic product and their deficit below 3 percent of GDP. While Italy’s deficit is still below the 3 percent ceiling, its public debt stands at 132 percent of GDP and is projected to rise further.

ITALY SOCIAL REFORMS FIGHTING AUSTERITY

The flagship policies of the two governing parties — including a pensions reform allowing workers to retire early and a so-called citizens’ income for poor jobseekers passed in this year’s budget — will mean more public spending. According to the Italian treasury’s own estimates and the Commission’s forecasts, such measures will fail to trigger growth or reduce debt.

The Commission in December told Italy it could increase its budget deficit to 2.04 percent of GDP to avoid increasing the country’s debt pile. Instead, Rome’s deficit has increased to 2.5 percent this year and is set to reach 3.5 percent in 2020.

Living standards down, inequality up

It could take Europeans up to 25 years to regain the living standards they enjoyed five years ago.

“The only people benefiting from austerity are the richest 10% of Europeans who alone have seen their wealth rise. Greece, Ireland, Italy, Portugal, Spain and the UK – countries that are most aggressively pursuing austerity measures – will soon rank amongst the most unequal in the world if their leaders don’t change course. For example, the gap between rich and poor in the UK and Spain could become the same as in South Sudan or Paraguay,” added Alonso.

Eleven years on, leading proponents of austerity such as the International Monetary Fund and many respected economists are starting to recognise that these measures have not only failed to achieve their objective to shrink government debt and budget deficits, but have also increased inequality and stunted economic growth.

Unemployment in many European countries is hitting record highs. Women and young people are being hit hardest. In the UK, more than 1 million public sector jobs will be cut by 2018, and twice as many women than men will lose their jobs. Wages are falling fastest in countries facing the harshest austerity prescriptions. Almost one in ten working households in Europe now live in poverty and it could get much worse. For example, tough mortgage laws in Spain let banks to evict 115 families from their homes every working day. Even those in work will be significantly poorer than their parents. Child poverty across Europe is set to rise.

Lessons from the past

“History is repeating itself. Our leaders are ignoring the profound pain that austerity cutbacks had for many years on people in Latin America, South East Asia and Africa in the 1980s and 90s. Their economies shattered and the poor continued getting poorer even when growth made a come-back,” Alonso said. Basic services, such as education and health, were cut or privatized, excluding the poorest and hitting women hardest. As a result, the gap between rich and poor widened.

In Indonesia, it took 10 years for poverty to return to 1997 levels, while in some Latin American countries it took 25 years to bring levels of poverty back down to where they were before their crises began in 1981. “Europe is heading in this direction now,” Alonso said.

How does the UK stack up?

General government gross debt was £1,837.5 billion at the end of 2018, equivalent to 86.7% of gross domestic product (GDP) and 26.7 percentage points above the reference value of 60% set out in the Protocol on the Excessive Deficit Procedure.

General government gross debt first exceeded the 60% Maastricht reference value at the end of 2009, when it was 63.7% of GDP.

General government deficit (or net borrowing) was £32.3 billion in 2018, equivalent to 1.5% of GDP and 1.5 percentage points below the reference value of 3.0% set out in the Protocol on the Excessive Deficit Procedure.

This is the second consecutive year in which government deficit has been below the 3.0% Maastricht reference value.

The Maastricht Treaty signed in 1992 foresaw the creation of the Euro. It organised the way that multilateral fiscal surveillance would be conducted within the European Union. The provisions regarding the EDP are currently defined in the 2012 consolidated version of the Treaty on the Functioning of the European Union (TFEU).

The surveillance is based on the EDP which sets out schedules and deadlines for the Council, following reports from and on the basis of opinions by the Commission and the Economic and Financial Committee, on how to judge whether an excessive deficit exists in an EU Member State.

The TFEU obliges EU Member States to comply with budgetary discipline by respecting two criteria: a deficit to GDP ratio and a debt to GDP ratio not exceeding reference values of 3% and 60% respectively, as defined in the Protocol on the EDP annexed to the TFEU.

Article 126

(ex Article 104 TEC)

1. Member States shall avoid excessive government deficits.

2. The Commission shall monitor the development of the budgetary situation and of the stock of government debt in the Member States with a view to identifying gross errors. In particular it shall examine compliance with budgetary discipline on the basis of the following two criteria:

3. If a Member State does not fulfil the requirements under one or both of these criteria, the Commission shall prepare a report. The report of the Commission shall also take into account whether the government deficit exceeds government investment expenditure and take into account all other relevant factors, including the medium-term economic and budgetary position of the Member State

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